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By Paul Kagan
You have your red states and you have your blue states. And you have your couch potatoes and your gadget freaks. This country isn't divided just politically. What's happening in media is a full-fledged revolution. It's easy enough to understand why: Demographic shifts are sending electronic tsunami waves into households worldwide. Younger people consume media, like music, in no way like their elders. And thanks to their rapidly growing income, they have the capital to indulge in their digital delights. Continued promotion of digitizing the "living room" is a joke. The waves go everywhere.
Example: Newsoft, a Taiwanese company, introduced a new acronym at the Consumer Electronics Show in Las Vegas this month. Its Presto! WVR is a wireless video recorder that enables viewing or editing of a variety of video sources in numerous locations. Note their new buzzwords: seamless viewing, a high-performance DVD burning kernel, enhanced MPEG transcoding and their Dynamic Transport Stream Control Mechanism. That's a lot more than off-on and change-the-channel, but that's the whole point. What once was, isn't good enough in a seamless media world.
Microsoft's Bill Gates titled his traditional CES keynote "Upgrade Your Life," and The Washington Post's Leslie Walker, asking "do we need or want it?," concluded "probably not." Red states, blue states. Growing segments of the population are serial users of media. They have been demanding more content, in more places, at faster speeds, from smaller devices, at reasonable prices, networked together, for more than two decades. Most of us have thought this revolution would center on the TV set, the PC or on a media server in the closet. This month, it seems to be cell phones. SmartVideo Technologies, with help from the ubiquitous Microsoft, says it will stream live TV from CNBC and The Weather Channel into the colorful screen in your hand.
Meanwhile, CES continued to disgorge new versions of the home servers we've heard about for so long. In the same category of "we want in," Hewlett-Packard has leaped into the retail big-screen TV business. Here I agree with The Post's Walker: Do we need or want it? Probably not. But Dell did it, making H-P go beyond its small share in digital cameras. Samsung, the hottest Asian company in consumer electronics the last two years, is pushing a record 80-inch plasma, with a 102-inch in development. And Carbon Nanotechnologies of Houston envisions flat-panel sets with pictures as good as conventional CRTs but cheaper than plasma and LCD. Hopefully, it won't wait until the world's consumers have fully invested their media budgets in the "current next new thing." One of the more revolting aspects of the media revolution is the junking by the U.S. population of a quarter-billion analog TV sets that largely don't need repair.
Cable operators, programmers and vendors were all over CES, although their largest provider, Motorola, made headlines with cell phones built into skiwear. It's a natural: Top Gun on the slopes, locking in on a target. Moto also is serious about selling phones in headsets to skateboarders, which shows that moms will spend to get their kids home for dinner. Could a 2.5-inch foldout video screen be far behind?
Comcast went to the show happy, as the recipient of an extremely bullish cover story in the Dec. 27 issue of Barron's. How about this description right on the front page: "With a $38 billion makeover almost complete and revenues likely to grow explosively over the next few years, Comcast will be a winner in the phone, video, TV and data wars. Wall Street hasn't caught on." I wrote the first bullish articles Barron's ever published on cable, but they've rarely loved the industry since. This time, they quoted one analyst's view that Comcast stock "could be worth about $40" because trading "in the low $3,000s per customer, it probably deserves a premium valuation to the $3,800 to $3,900" Cox paid to take its cable MSO private. Lots of laughs. Cox priced in a minority discount. If they wanted to turn around and sell to someone in a fully valued private transaction, they'd get north of $5,000. I've said all along that well-operated cable subs could be worth $6,000. That's 15x cash flow at $83/month/sub, with a 40% cash flow margin. It's what AT&T paid at the top of the last bull market, and it was a mistake then. It won't be in the future.
Analyst/investor Paul Kagan is chairman/CEO of Kagan Capital Management, Inc. in Carmel, Calif. He has owned shares of Comcast since 1977, when it had an equity value of $8 million, debt of less than $6 million and 75,000 subscribers worth $186 each. Information in his columns is not intended to be a recommendation to buy or sell securities.
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